Cogeco 2006 Annual Report Download - page 32

30 COGECO CABLE INC. 2006 Management’s Discussion and Analysis
FINANCING
As at August 31, 2006, the Corporation has used $623.3 million of the Term Facility.
On July 28, 2006, the Term Facility and the operating line of credit of the Corporation were restructured by an amended
and restated credit agreement for credit facilities totalling $900 million. The Term Facility is composed of four tranches:
a fi rst tranche, a revolving loan for an amount of $700 million available in Canadian, U.S. or euro currencies; a second
tranche, a swingline of $25 million available in Canadian or U.S. currencies; a third tranche of $150 million fully drawn,
and a fourth tranche of €17.4 million euros fully drawn. The Term Facility is repayable on July 28, 2011, except for the third
tranche of $150 million which is repayable as follows: $15 million on July 28, 2008, $22.5 million on July 28, 2009,
$37.5 million on July 28, 2010 and the balance on July 28, 2011. Earlier repayments can be made without penalty. The
Term Facility requires commitment fees, and interest rates are based on bankers’ acceptance, LIBOR, EURIBOR, bank prime
rate loan or U.S. base rate loan plus stamping fees. The Term Facility is secured by a fi rst fi xed and fl oating charge on the
assets of the Corporation and certain of its subsidiaries except for permitted encumbrances, including purchased money
obligations, existing funded obligations and charges granted by any subsidiary prior to the date when it becomes a subsidiary
subject to a maximum amount. Cogeco Cable continues to satisfy the various conditions stipulated in its financing
agreements whilst being on schedule to meet interest and principal repayment obligations. Of all Cogeco Cable’s
debt instruments, the bank facilities usually set the most restrictive limitations on the Corporation’s activities and
operations. The most important restrictions cover maintaining certain fi nancial ratios, authorized investments, disposal of
assets and distributions to shareholders.
During the next fi ve years, Cogeco Cable’s required principal repayments on its long-term debt, excluding those under
capital leases, amount to $1,137 million. In fi scal 2007 Cogeco Cable’s $125 million Second Secured Debentures will
be repaid. For that repayment, the Corporation has the fl exibility to use the undrawn portion of its existing Term Facility.
The $15 million portion of the third tranche of the Term Facility will have to be repaid in fi scal year 2008. The $150 million
Senior Secured Debentures, the $22.5 million portion of the third tranche of the Term Facility and the US$150 million
Senior Secured Notes will have to be repaid in fi scal 2009 for a total amount of CDN$411.2 million (the Senior Secured
Notes are converted into CDN$ using the exchange rate on the cross-currency swap agreements). In addition, the $37.5 million
portion of the third tranche of the Term Facility will have to be repaid in fi scal year 2010. The Term Facility drawn for an
amount of $548.3 million will have to be repaid in fi scal year 2011.
As at August 31, 2006, Cogeco Cable had a working capital defi ciency of $315 million compared to $121.5 million as
at August 31, 2005. The greater defi ciency is mainly attributable to the increase in the current portion of long-term debt
as the Corporation’s $125 million Second Secured Debentures Series A matures in less than a year and the Cabovisão
working capital defi ciency of $93.2 million at the end of fi scal year 2006. Cogeco Cable maintains a working capital
defi ciency due to a low level of accounts receivable since the majority of the Corporation’s customers pay before their
services are rendered, unlike accounts payable and accrued liabilities, which are paid after products or services are rendered.
In addition, the Corporation generally uses cash and cash equivalents to reduce Indebtedness.
In fiscal 2006, Dominion Bond Rating Service (DBRS) and Standard & Poor’s Ratings Services (S&P) downgraded
Cogeco Cable’s ratings. DBRS downgraded the rating of the Senior Secured Debentures and Notes to BB from BB (high)
rating and on the Second Secured Debentures to BB (low) from BB rating based on the higher leverage as a result of the
acquisition of Cabovisão and increased business risks involved with operations outside of Cogeco Cable’s incumbent
territory. S&P downgrade as well the Senior Secured Debentures and Notes to BB+ from BBB- rating and the Second
Secured Debentures to BB from BB+. S&P downgraded Cogeco Cable’s rating due to the fact that Cabovisão operates in
weaker demographic areas that have a higher degree of competition and has a weaker profi tability than the Canadian
operations. The lack of operational and capital expenditures synergies between the Canadian and Portuguese operations
as well as management inexperience are additional factors considered in the decision to downgrade the rating. Based on
the Term Facility in place and anticipated free cash fl ow for fi scal 2007, refi nancing can be postponed until fi scal 2009.